Norms for evaluation, Financial Accounting

You may just be wondering as to see that how we control activities by ratios. The answer is not tough to seek. Ratios we have known for control of activities measures relationships among key elements at any point of time. That a measure is then compared along with some 'norm' and the causes for deviation investigated. An action plan is after that prepared and implemented to eliminate the causes. For illustration, Nagpur Textile Mills Ltd. reports 89 days of inventories conduct on an average against net sales throughout the year 2002. Here, how do we judge if the diagram of '89 days' is only regarding okay for a firm such as "Nagpur Textile Mills Ltd."? The subsequent appear to be the ways for estimating this figure:

a) Against a trend over time: The subsequent data might be observed for Nagpur Textile Mill:

Year Average Number of days of inventory:

1998 90

1999 118

2000 115

2001 107

2002 98

Average number of days = Net sales /((opening inventory + closing inventory)/(2/365))

b) Against an average of some past period: The relevant data for Nagpur Textile Mill may be estimated on the origin of the mean of average number of days that are: (90 +118 + 115 + 107 + 89)/5 = 519/5 = 104 days approximately.

c) Against an industry average: A specific number of firms selected randomly or otherwise from textile industry, to that Nagpur Textile Mill Ltd. belongs, may be utilized to estimate the industry average such as a norm. Hence, data relating to average number of days of inventory of, as like 20 textile units of the size and kinds of Nagpur Textile Mills Ltd. might be averaged for an exact year for that Nagpur Textile's ratio is being estimated. Period averages for firms may also be utilized to acquire a grand mean for evaluation.

d) Against an average of a cross-section sample: The Reserve Bank of India publishes financial statistics of joint companies.

Their sample for the period from 1998 or 1999 to 2000 or 2001 as well as 1927 public limited companies along with paid up capital of Rs 100 crores and above. Year-wise averages for corporate sector as an entire are available. In a same manner, the ICICI publishes elaborate data on financial performance of companies assisted through them. The newest study pertains to the year 1984 - 1985 and contained 417 companies in various industry groups. Such sample covers around 50 percent of the whole private corporate sector in terms of paid-up capital. Year-wise average for industry groupings is obtainable.